States' indebtedness may soar 36% to Rs 68 trn this year: Report

The pandemic-hit states are staring at a record 36 per cent jump in their indebtedness to Rs 68 trillion, which will be a decadal high this fiscal year as their revenue is seen plunging 15 per cent, according to a report.

This will have their economic output shrinking by at least 2-4 per cent this fiscal year, Crisil said in the report on Tuesday.

This is mainly attributable to the falling goods and services tax (GST) collections and sticky revenue expenditure of the states that has gone up massively after the lockdowns, which began in late-March, the report said.

The report is based on the state of finances of the top-18 states, including Goa and excluding Delhi, which account for 90per cent of the aggregate gross state domestic product (GSDP).

The states are set to face a revenue deficitof 6 per cent this fiscal, up from 1.5per cent last year, it said. Capital outlay will fall to 2.7 per cent from 3.8 per cent, increasing their gross fiscal deficit to 8.7per cent from 5.3 per cent in 2019-20 and total debt to Rs 68trillion from Rs 58 trillion in 2019-20.

The indebtedness of the states is going to hit a decadal high this fiscal year, rising at least by a hefty 36 per cent or Rs 10 trillion to Rs 68 trillion by the end of this financial year, CRISIL said in the report.

States' overall revenueis estimated to decline by almost 15per centon-year this fiscal in line with a shrinking economy, it added.

The rating agency also said allthe revenue sources of the states will take a hit, with almost 65per centof the decline attributable to a fall in state GSTcollections, and GST compensation payments and tax devolutions to the states from the Centre's own tax pool. They together form nearly 50per centof states' revenue receipts, it added.

CRISIL Director Ankit Hakhu said the overall debt of the states, including guarantees and loans provided by the Centre to partly compensate for the GST shortfall, will increase sharply by Rs 10 trillion this yearto Rs 68 trillion by the end of this financial year. This will expand the states' indebtedness to atleast 36per cent, which is anexpansion of 600 bps on-year.

The math assumes a likely shrinkage of 2-4per cent in states' nominal GDP this year. This will remain sensitive tocontainment of pandemic and states' policies towards unlocking the economy, he added.

Manish Gupta, a senior directorat the agency, said that amid falling revenue receipts, the states' revenueexpenditure would remain largely sticky due to high committed expenditures towards salaries, pensions and interest costs, and essential developmental expenditures.

These cumulatively contribute to 75-80per centof the total revenue expenditureof the states and will be difficult to cut down, he said.

Given the stretched revenue accounts, the states may moderate their capital expenditures by around 30per cent, largelyto remain within fiscal borrowing limits, Gupta added.

But, despite this capital expenditure moderation, the states' gross fiscal deficit is likely to expand by around 65per centyear-on-year this year, substantiallyincreasing their borrowing needs.

However, the report expectsa substantial recovery in revenue mop-up to the pre-pandemic levels next fiscal, supported by the ongoing economicrevivalbut any delay in this will result in continuing elevated indebtedness and will be credit-negative.